Rhodia Réf :
Table of Contents
1. Definitions
a. Objectives
b. Scope and effective date
c. Responsibilities
d. Segregation of duties
2. Planning and preparation
a. Annual planning
b. Site procedure
3. Performing the physical inventory
a. Physical inventory preparation
b. Perform an accurate count
c. Input the results of the count & validate the inventory discrepancies
4. Post inventory
a. Analysis and accounting treatment of inventory discrepancies
b. Reports
Appendices
a. Appendix 1: Annual planning
b. Appendix 2: Guidance for discrepancies analysis
c. Appendix 3: Reports
d. Appendix 4: IAC controls
e. Appendix 5: Check list

Definitions

Objectives

This document provides a step-by-step guide for physical inventories that allows us to:

• Verify the existence and ownership of inventories,
• Implement and monitor continuous improvement systems and processes.

Scope and effective date

• This procedure applies to all Rhodia Group entities as well as to all Rhodia-controlled companies, and to all warehouses on site and off site.

• The procedure deals with the inventory count of:

31000100Raw material
31000160 Consumable supplies inventory
31000200Raw material-industrial supplies
31000300Raw material-packing material
37000100Finished products
37000200Goods for resale
37000400Semi-finished products

• The procedure is effective from the publication date.

Responsibilities

Finance responsible assigned (FRA)

• Determines the annual schedule in conjunction with the inventory manager and ensures schedule adherence, (§ 2a)
• Prepares a site inventory procedure, (§ 2b)
• Validates the inventory discrepancies analyzed by the inventory manager,
• Prepares and sends inventory reports.

Inventory manager or his representative (PIM)

• Participates in the preparation of the physical inventory and in the inventory counts,
• Analyses and justifies any significant discrepancies.

Inventory count team

• Performs an accurate count in accordance with the safety rules and must be familiar with the specific counting procedures.

• Responsibilities can be adapted for each plant according to the segregation of duties (§ 1d), but any modification should be written in a procedure.

Segregation of duties

Segregation of duties (SOD) reduces risk of error and fraud so that no single individual can adversely affect the accuracy and integrity of the count.
Segregation is based on separation of the three following process

• Business process : Purchase/ Procurement, Shipment, Consumption in production
• Physical custody of assets process: counting, recording of movements
• Accounting process: invoice validation, adjustment resulting from inventory count

Respect for SOD rules means that:

• Personal involved in one process should not also have responsibilities in either of the other two processes.
• No one should be in a position of self validation, cumulating execution and supervision.

Planning and preparation

It is a good practice to prepare a check list before each count. It is possible to use a model that is in appendix 5.

Annual planning

Responsible: Finance responsible assigned with inventory manager
Frequency: Annual with a quarterly up-date
Control: IAC 04.13.00.04
Example: Appendix 1
The annual planning includes:

• A list of the inventory storage location:

• On site
• Off site: inventory on consignment, held in third parties facilities or by toll manufacturers.

• Frequency of cycle counts
• A planning by type of inventories taking into account the following objectives:

• Except for industrial supplies:
  • A complete count of the items included in the inventory records of each warehouse should be done for 31st December.
  • A count of items representing 90% of the value of prior end inventory should be done as of 30th September, each year.
• A special timeframe is applied for industrial supplies:
  • All references must be checked over a 3-year period.
  • By December 31st, references counted must represent at least 80% of the total value of the industrial supplies inventory.

Site procedure

Responsible: Finance responsible assigned with inventory manager
Frequency: Annual
Controls: IAC 04.13.00.01 & IAC04.14.00
The site procedure has to include:
- The name of the Finance responsible assigned who is authorized to validate physical inventory discrepancies.
- Particularities linked to the segregation of duties (§ 1d).
- A reference to applicable safety procedure.
- Determination of a threshold for the value of discrepancies above which a second count must be performed. A 0.5 % threshold of the total amount of the inventory concerned is recommended, it will be applied as such if the site inventory procedure doesn't specify otherwise.
- Determination of a threshold for the value of discrepancies above which the finance manager or the business controller, the plant manager and the enterprise supply chain director are informed (§ 4b),
- Specific scenarios in which no recount is required:

• Meter readings or print in continuous production environments,
• Scenarios specific to the site's activities.

Performing the physical inventory

Physical inventory preparation

Responsible: Finance responsible assigned with inventory manager
Reference:Inventory check-list
Together, the Finance responsible assigned and the inventory manager:

• Organize a preparatory meeting with the operational team to:

• Define which warehouses and products are included in the count,
• Review counting instructions,
• Define roles and responsibilities,
• Ensure availability of information systems, printers and fork-lift trucks.

• Notify affected parties providing adequate lead time to plan appropriately:

• Notify suppliers for which deliveries will not be accepted during this time,
• Advise customers in advance of the shut-down period,
• Inform employees to allow them sufficient time to plan for the activity.

• Prepare the storage area:

• Arrange items so that they can be easily counted,
• Ensure there are no hazards in the warehouse that could be dangerous during the inventory count,
• Clearly mark package quantities if necessary,
• Clearly mark items that will not be counted with "DO NOT INVENTORY".

• A finance representative supervises off-site physical inventory when its value is above 400k€. Below that threshold, any Rhodia employee or any person delegated by Rhodia can take part in the physical inventory.

Perform an accurate count

RCS procedure:
Warehouses in IM: IM_004 Creating an IM physical inventory
Warehouses in WM: IM_003 Performing a WM inventory
Intranet: Doc / EN English-Anglais / P2P Purch.2Pay & InventoryMngnt / 7 Internal Storage Processes
A complete count requires that the inventory being counted, includes all the items that should be present and does not include items that are not part of the inventory. It requires that:

• No inventory movements (receptions, shipments or transfers) may be recorded in the inventory register during the physical count of the warehouse:

• Everything is shipped before the physical inventory begins,
• No movement of material is made during the count process,
• No order is filled or material is received during the count process.

• It is recommended to count when production is stopped or during a period when there is limited movement of inventory.

• Any items shipped and not picked up or receipts that come in are segregated and labelled "do not inventory".
  
• Blind counts are performed. The physical inventory is made without the knowledge of the quantity in the inventory records:
  

• Batch number, item code, description, location, and other information necessary to perform the count are printed on the counting sheet but not the item quantity information.

• Each count team has an assigned zone to count. Counting team progression should be as linear as possible. They receive count sheets and tags. In the absence of bar-coding / scanner device, it is recommended that counting is performed by team of two persons:

• One person counts the item and attaches a tag to the inventory items that were counted,
• The second one records on the inventory document the actual quantity counted.

• At the end of and during the inventory count process, the finance responsible assigned and the inventory manager walk through the warehouse and visually inspect that a count tag is attached to every inventory item to check that all inventory items have been counted and also ensure that the inventory is not counted twice.
  

  Input the results of the count & validate the inventory discrepancies

• Check that all count sheets are collected and that they are input into the system.
  
• Recording of count results is made with dedicated functionalities of the inventory management system.
  
• A list of inventory discrepancies calculated automatically by the inventory management system is printed.
  
• The Finance responsible assigned identifies items that require a second count according to the rules defined in the site procedure. As far as possible, it is a different count team who performs the second count.
  
• The results of the second count are recorded, and if necessary a third count can be asked. Otherwise a definitive list of inventory discrepancies is sent to the inventory manager.
  
• Finance responsible assigned validates the physical inventory with the dedicated transaction (MI07 in RCS) or by signing the discrepancies list.
  
• The inventory documents (count sheets and discrepancies list) are archived by the inventory manager.
  

  Post inventory

Analysis and accounting treatment of inventory discrepancies

Responsible: Finance responsible assigned with inventory manager
Guidance for analysis: Appendix 3

• Inventory discrepancies above the threshold defined in the site procedure are analyzed and explained by the inventory manager who sends his analysis to the Finance responsible assigned.
  
• The analysis and final list of inventory count discrepancies are

• Signed off and dated by the inventory manager and the Finance responsible assigned,
• Archived as inventory supporting documentation as part of the accounts adjustments documentation.

Reports

Responsible: Finance responsible assigned with inventory manager
Controls: IAC 04.13.00.03
Example: Appendix 4
RCS support: Workbook BW – Physical inventory coverage rate (Core query)
Transaction MI24
- After each warehouse count, the Finance responsible assigned prepares an inventory report that includes:

• A physical inventory summary description (inventory type, scope, coverage rate, list of adjustment…)
• A list of the people who participated to the count
• An explanation of the most significant variances in quantity/ value (above the fixed threshold)
• A signature (hand written or by mail) of the report by all the people having responsibilities in the count (supervisors of counting team and of key-punching team, inventory manager)
• Validation by the Finance Manager or the Business Controller, the plant manager and the Enterprise Supply Chain Director when the sum of the adjustment is above a threshold defined in the procedure

• Every month, the Finance responsible assigned prepares a "cycle counts monthly recapitulative report" that includes:

• An explanation of the most significant variances in quantity/ value (above the fixed threshold)
• Validation by the Finance Manager or the Business Controller, the plant manager and the Enterprise Supply Chain Director when the sum of the adjustment is above a threshold defined in the procedure

• Every quarter, the Finance responsible assigned updates a progress report on physical inventories.

  Appendices

  
  
  Appendix 1: Annual planning
  Appendix 2: Guidance for discrepancies analysis
  Appendix 3: Reports
  Appendix 4: Reminder on IAC controls
  Appendix 5: Check list
  

  Appendix 1: Annual planning

Appendix 2: Guidance for discrepancies analysis

Adjustments are analyzed in accordance with the value of the adjustment and type of item involved, in order to:

• Identify failures in the control systems so that improvements can be made,
• Reduce similar discrepancies in the future,
• Ensure that the proper adjustment was made,
• Evaluate indicators of trends or system problems for corrective action,
• Detect negligence, abuse, or theft

Timely investigation of inventory adjustments is essential. Delay increases the complexities of adequate research and reduces the probability of conclusive findings.
To make the analysis, it is necessary to use the material document history to look for anomalies for the product and batch under investigation. (transaction MB51 in RCS)
The following plan gives an example of the main inventory movements that can create discrepancies and the main actions that could be taken to avoid them:


















1 Reception: Movement type: 101-102 Goods receipt for purchase order into warehouse/stores

• • Raw materials: Compare reception in RCS with delivery notes
  • Finished products: Check process orders

2 Consumption in process orders: Movement type: 261-262

• • Check process orders in which the material is consumed

Question 1

• • Are production declaration made at standard quantity? => If yes, it can create under or over consumption :

Action:

• • Review standard unit consumption in BOM
  • Organize regular check in process orders and if necessary adjust the consumption through a process order

Question 2

• • Error of declaration in a process order.

Action:

• • Improve analysis of variance on process orders (transaction ZWPP40A in RCS)

3 Transfer storage location: Movement type: 311

• • Check if the item is in an other warehouse or workshop
  • Extract the inventory of this item/batch in all warehouses (transaction MB52 in RCS)

4 Transfer posting material to material: Movement type: 309

• • Control the use of this movement (control IAC on critical transaction)

5 Goods delivery: Movement type: 6XX

• • Compare reception in RCS with delivery notes

Appendix 3: Reports

Progress report on the cycle counts

Appendix 4: IAC controls 2010

Check HERE for update in the section Documentation of the IAC eRoom.

Appendix 5: Check list